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More Bad News for the Trade Bubble

Posted by: Michael Mandel on April 15

I was reading one of my favorite bloggers, Brad Setser, and he had this to say:

The FT – more than most – has recognized the challenges created by a global banking system and national regulation. A recent leader argued: “The current mismatch of globalised finance and national governance is unsustainable. Either governance becomes more globalised or finance less globalised.“

My guess is that finance will necessarily become a bit more national. The current crisis has shown than highly leveraged intermediaries require a government backstop, and for now there is no global taxpayer willing to bailout global banks that go bad.

Now, I’d argue with Brad about the FT—I’ve written about the importance of having a global central bank multiple times over the years. For example, back in 2006 I had a cover story “Can Anyone Steer This Economy?” where I wrote:

No matter which party you belong to, or which Big Idea or school of economic policy you subscribe to, one thing is clear: Globalization has overwhelmed Washington’s ability to control the economy. Whether you’re a Republican supply-side tax-cutter, a Wall Street deficit hawk of either party, or a Silicon Valley techie type, your preferred levers of economic policy just don’t work as well as they once did.


a Big Big Idea—probably too big to even consider right now—would be the creation of global institutions for governing the world economy. History tells us that market economies are prone to financial crises, to which the only solution is a strong central bank. During the Asian financial crisis of the 1990s, for example, the Fed played that role.

But with the explosive growth of China and India, that sort of role for the Fed is no longer feasible, and no new institution has arisen to take its place. As former Treasury Secretary Robert E. Rubin, now a top official at Citigroup, recently said: “There’s no policy mechanism for bringing together the countries that really matter in the global economy.” The best solution would be some sort of global central bank with real powers—but that’s not going to happen until there’s a big enough financial crisis to truly scare people.

This was written in 2006. Is this crisis big enough to scare countries into a global central bank?

No. No. No. The U.S., utilizing its privileged position as the world currency, has one get out jail free card, which it is playing now. This crisis is more like to end the way that Brad says above—a retreat from the globalization of the financial system, which will mean a retreat from unbalanced trade (which requires massive cross border capital flows).

It’s worth repeating that. You need to have a global financial system to support the cross-border capital flows that come along with unbalanced global trade. So if we don’t have a global financial system…which we won’t…we will inevitably end up with more balanced trade, by one way or another. Poof. Wave a big part of the trade bubble good bye.

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Reader Comments


April 15, 2009 11:38 PM


a backstop for the financial crisis could at least have been conceived of. The huge worldwide economic stimulus that is an attempt at a backstop for unsteady capital allocation: doesn't that feel a lot more ad-hoc?

I get the sense that Obama and co. are more acting out of a compulsion to do *something* than surety of specific results. You've made some defense for education and healthcare as job stimulus, but that really just buys time with debt. Unless we've got a really good long term plan in the works, it might be that we'd have been better off letting the market alone, however politically infeasible that might be. Obama's long-term "economic foundation" talk is not convincing right now.
I'm still waiting with interest on the reverse black swan follow-up.

Mike Mandel

April 16, 2009 06:18 AM

Yes, it didn't have to go that way.

Almost ready.


April 16, 2009 06:25 PM

"You need to have a global financial system to support the cross-border capital flows that come along with unbalanced global trade." This strikes me as extremely insightful and absolutely true. It should be obvious, but it isn't/wasn't. I don't believe I have encountered such a clear articulation of exactly where we stand, anywhere else.

I wish that I had taken notes every time a politician said in one way or another that the trade deficit shouldn't matter (along with deficit spending).

CompEng, I'm in no position to defend the Obama way, but ad hoc doesn't bother me -- sort of like saying you shouldn't put out the secondary fires because they weren't part of the plan. The long-term plan could be super, or worthless, or non-existent, but it seems to me that there would be no chance until a position of stability is achieved, and I prefer lurching toward stability rather than deliberately driving off a cliff to get there. Sorry that I'm not offering much more than metaphors. The public may also be part of the problem by conveniently forgetting that they were never promised the luxury of just sitting back and waiting for the Obama miracles.


April 16, 2009 10:02 PM


If you have a chance to save the forest from the fires, you open up the hoses. If not, you may just clear the surrounding area to help keep it from spreading. Those are the kind of choices we need to be making: if we can help nudge the economy into a sustainable position, we should. If we're just charging in and hoping, we could ruin our chance for a better action. That's what's wrong with ad-hoc: it's costly.


April 21, 2009 05:02 PM


I'm having a lot of trouble answering. Sure, everybody outside of the marketing department knows that when marketing drops in an ad hoc change, the whole plan goes to pieces unless you spend extra money. The thing is, how much more can Obama and company know about anybody's financial position and secrets than the rest of us? For the banks, certainly, between the Treasury and the Fed, there is an obligation to worm the true picture out of them. If that true picture should be untenable, then what?

The thing is, the system would have been just as untenable before it broke -- we just wouldn't have incriminating evidence yet. There is an element of confidence to a monetary system. Ingenius ad hoc maneuvering just might be able to restore confidence in a system that is as unworthy of confidence now as it was when we believed in it. The alternative would be disastrous.

On the other hand, for all I know, the system can be made robust. We would like to believe that and see a credible plan for getting there. Whether the price tag would be acceptable is another story, and maneuvering to pull it off in appearance but not reality could still be required. I wouldn't know.

Actually, I did not understand how the long-term "economic foundation" comes into doubt because of style points lost now. I certainly am sounding like an apologist, but I used to search high and low for what was the Bush economic policy, and I never could find anything beyond a few nice words. Yet for 8 years, nobody seemed to care what it was. Nobody even asked why shopping was patriotic, did they? Now we want the plan spelled out within the first 3 months, in the middle of near catastrophe. The plan is there, at least the mid-term, in the stimulus package and the budget. I'm frankly impressed by the coherence and timeliness and openness, though I still have much to absorb and think through.


April 22, 2009 02:22 PM


It's true that monetary policy is to some degree a faith-based system: trust in the system is a substantial component of its viability. The same is true to a lesser extent of the "economic foundation" in general.

The Bush economic policy was:
1. A public belief in market-based capitalism and free trade (through an MNC lobbyist lens)
2. Strong fiscal and monetary stimulus (always a short-term play at best)
3. Strong subsidies for politically powerful industries: finance, oil, military suppliers, certain pieces of agriculture, multi-national America-based manufacturers
4. Strong support for politically powerful entitlements: medicare, medicaid, social security (when not trying to privatize it)

Basically, Bush pandered to anyone he had to politically, bulldozed anyone opposed to his principles that he thought he could win a fight with, and left the rest alone. His economic policy was in keeping with his political philosophy, and garnered huge criticism then and now.

The essence of Obama's economic platform was that he believed Bush's policies created a very uneven wealth distribution, and that this was bad for everyone. He held the liberal opinion that greater management of the economy for the good of all could and should be done, and that we best get started.
If you have the cojones to make such a claim, you ought to have a strong long-term vision, as opposed to the conservative camp that philosophically believes that no such long term vision is useful or necessary. But, however timely and open, Obama's economic vision still feels like a relatively short term thing. The only long-term themes I'm picking up are investment in infrastructure, wealth redistribution, a continuation of corporate welfare, a belief in regulation, but also a belief that markets are strongly preferred to central planning except where central planning has dominated in the US in the past (military, education, healthcare, the environment, and public infrastructure). And investment in military technology is being reduced. So Obama's "economic vision" is essentially the Bill Clinton vision with a bit more of a liberal slant.
But the long term plan is based on the premise that there's nothing wrong with the US economy structurally except that it benefits the rich rather than the poor, healthcare is too expensive, and public infrastructure projects (energy, internet, roads and schools) have been neglected.


April 22, 2009 04:37 PM


Well, yes, that was Bush policy, but you did not get it from the old

Ah, I think I detect a desire for the vision of America after the greening. It would be putting words in Obama's mouth for me to report what it is, and I doubt that this is the proper forum for me to carry on about what I think it is, so suffice it to say that it is probably ultimately up to "us" to make it work, or resign ourselves to the alternative.


April 23, 2009 08:26 AM


I think that's always the case. But one can hope for more :)


April 26, 2009 05:44 AM

passes coffee around to you guys and the guys at the FT. We already have a regulated and controlled global financial system. It's Basel II, soon to be III, IV and V, combined with the WTO. What you are asking for is the preservation of value when it is threatened by abuse by criminals, whether these are corrut politicians, as in the the US and the UK or countries with pyschological problems (like world war losers, Germany and Japan) or new kids on the economic block bullies (like BRIC). The global financial system (BASLE and WTO) that exists, has not been joined up with domestic legal systems. Hence the transmission of corruption and human rights abuses, globally. Let's leave aside global police (UN) the human rights (Den Haag) and the WHO. There is a global economy, it has been corrupted/hi-jacked by selfishness amongst the US (Iraq and torture) China (who want the Wests problems) and India (mob rule with mobile phones).


April 27, 2009 02:08 PM

An interesting bit form Paul Krugman's blog:
"For what it’s worth, a key conclusion from the IMF’s new World Economic Outlook is that recessions caused by financial crisis typically end with export booms, with the trade balance improving, on average, by more than 3 percent of GDP. I find this a disturbing result: we’re now suffering from a global financial crisis, which means that the usual driver of recovery will only be available if we can find another planet to export to."

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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